Dissertation on "Credit Crunch on UK Residential Property"

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credit crunch on UK Residential property: Is there an opportunity for the buy-To- let?

The effect of the credit crunch on UK residential property: Is there an opportunity for the buy-to-let?

The economic crisis which emerged within the American real estate sector has expanded throughout the world and it has even come to impact the residential real estate sector in the United Kingdom. The manifestation here is however different, due to elements of particularity, namely the housing crisis and the national dependence on the real estate industry. In this context however, a new opportunity is identified, that of buy-to-let purchases, which are however only perceived as a temporary interest and opportunity for investors.

Introduction

The twenty first century has brought about a wide array of challenges for the modern day population. It is for instance a time of massive technological developments, which impact all features of life. It is also a time in which globalization leaves its deepest mark, but in which cultural differences and terrorism are mostly threatening.

At an economic level, the century has brought about one of the most severe crises, easily compared to the Great Depression of 1929-1933. It has commenced within the United States real estate sector and it gradually expanded to the totality of American sectors, and eventually throughout the rest of the world.

The root cause was constituted by the issuing of subprime mortgages by the American banks, and this gradually snowballed into one of the greatest crises of the modern history (Rayner, 2008). The commencement of the crisis was

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felt in the United States in the third quarter of 2007, at the level of the American financial industry. Also at that point, the first shock waves were sent to the rest of the world. The immediate impact was that of banking institutions restricting their operations, increasing the costs of borrowing and generally reducing the circulation of liquidities in the market.

Countries were impacted at various degrees by the crisis. A trend which has been observed was that of major impacts on the highly liberalized countries, which activated intensely within the international market, and which as such, relied much of their economic stability on the stability of their partners. States which on the other hand maintained their distance and implemented more prudential policies suffered less intense impacts of the economic crisis.

The United Kingdom was severely impacted by the internationalized economic crisis and its manifestation here was similar to that in the United States. Specifically, the crisis commenced within the real estate sector, correlated with problems in the financial sector. The first victim was constituted by Northern Rock, one of the largest (fifth, to be precise) mortgage lenders in the United Kingdom. The institution became unable to financially support itself and its customers and sought assistance with the Bank of England. As a prudential policy however, the Bank of England did not lend any money to Northern Rock, but precipitated its collapse, and forced its ultimate nationalization (Giles, 2003).

At a national level, the housing industry in England followed a descendant path, in which financial institutions became more restrictive in the processes of granting mortgages. The unavoidable effect was that of a decrease of the operations in the real estate market, as the demand suffered reductions. In a numerical figure, Halifax lending mortgage lender stated that the drop in the prices of real estate properties was of 10.9 per cent (hbos, 2008).

In this context, a question is being posed relative to the specifics of the means in which the internationalized economic crisis has impacted the real estate sector in Great Britain. In this endeavor, special emphasis would be placed on the South East of England. Additionally, the underlying purpose is that of identifying whether the downturn in the real estate industry has created a situation in which it is likely for a specific sector to develop -- that of buy-to-let. In order to answer these questions, gradual research stages are completed. At a primary level, the background information is introduced. Secondly, the available literature is researched and the most relevant findings are presented and detailed. Third, the research methodology is presented; findings are drawn and finally discussed. The endeavor comes to an end with a section on concluding remarks which restates the most important findings of the research process.

3. Background information

The British real estate sector is a complex one, with a long lasting history. It has not only come to develop itself, but it has also managed to set the basis of forming the real estate sectors in the four major countries: the United States of America, Canada, New Zealand and Australia. Throughout the years, the legislations and manifestations of the real estate sectors have suffered various modifications, but their origins can be historically traced back to a feudal system, in which land was the sole compass of wealth, and in which the property rights were not granted to anybody but the king. Gradually, the property rights came to include the nobility, to eventually include the entire population which afforded to purchase the properties. From Great Britain, these values were transferred through colonization to the U.S., Australia, New Zealand and Canada to set the basis of their own real estate sectors (World Wide Legal Information Alliance, 2010).

Today, the British real estate market is characterized as one of the most developed markets in the world. It can be simply divided into residential market and commercial market. This current endeavor focuses on the residential sector, in which the main goods and services are represented by properties, mortgages and financial services. There are also several adjacent products and services, such as legal services upon purchase and/or rental, construction services, furnishing products or electronics products. The real estate sector represents an engine for economic development and this role explains the fall of the entire national economy, as the chain reaction set from the real estate sector.

The peak of the highest prices for real estate properties was achieved during the 1980s decade, and it is due to rapid economic development and an incremental access to financial resources. Additionally, in this context, the construction industry was delivering an abundance of housing units -- at higher qualities than before -- and the offer was increased. Furthermore, it is noteworthy to mention that the development of the real estate sector was also characterized by the newly implemented council housing, or a process by which people in need of housing could solicit it from the public institutions. The buildings were often of an inferior quality and the renting process was rigid and tedious. The system is maintained through today and in 2005, it was estimated that 20 per cent of all housing units in the country were under the property of local councils or housing associations (Word IQ, 2010).

The end of the 1980s decade and the first half of the 1990s decade were characterized by decreasing prices on the residential properties and this was the result of an economic crisis. The international recession generates socio-economic difficulties for the British population, who became unable to pay their mortgages. As a result, the period witnessed numerous repossessions by banks (Word IQ, 2010).

In terms of occupation rate, in 1992, it was estimated that out of the total of 23 million housing units, 66.3 per cent were occupied by their owners, with the remaining 33.7 per cent (7,751,000 housing units) being occupied by renters. The funds to make purchases were retrieved from a handful of financial agents, who dominated the market, but investments from institutions were uncommon. The trend was that of owning the property, rather than renting it and this perception of residential units was revealed at both social as well as economic levels. Julian Roche (1995) explains:

"Institutions do not invest in UK residential property for several historical reasons, mainly concerned with the high level of home ownership and the low status associated with renting: private landlords, whether corporate of individual have never had a good press in the UK since Rachman in the 1950s and institutions do not want anything other than high grade tenants" (Roche, 1995, p.9).

By 1996, the retail prices for the residential properties were met with significant increases, measured at rates as high as 20 per cent per annum. By 2005 however, the prices gained more balance and remained stable. In some cases even, they registered decreases. At that time, the residential housing stock represented over 22 million units, and it was estimated that 134,000 of the houses had been newly built.

An intriguing element was constituted by the fact that the growth in prices was uneven. In this order of ideas, while in London prices remain rather stable, massive increases were observed in the northern part of the United Kingdom, and in Scotland as well. In these regions, the majority of the purchases were closed by second home owners, and often with renting purposes; they came to compete with locals, drove up the prices of the real estate properties… READ MORE

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Quoted Instructions for "Credit Crunch on UK Residential Property" Assignment:

“

** REport to be writen in BRITISH ENGLISH

**I prefer a British ***** with knowledge of the UK property market that can use econometrics model to demontrate the relationship between different variables of the property market and test test the hypotheses.

**The ***** should collect primary research fromthe UK as specified in my project proposal below.

** All reference MUST be available to me in linksor sent by mail.

**The Litterature review must be at least 3500 words

** The bibliography should be attached to the report

**************

***********************

******************************

Project Report

The subheadings should be as follow

* Abstract

*****¢ Introduction

*****¢ Background

*****¢ Literature Review

*****¢ Methodology

*****¢ Data analysis, Test and Results

*****¢ Discussions

*****¢ Conclusions

I have below listed questions or key points that are relevant to each section

= An Abstract

Introduction

In this part should i be answering the questions below

ô€‚¾ What was the overall subject of your research?

ô€‚¾ What was the main aim of your research?

ô€‚¾ What specific business related questions or issues did you address in your research? Why is the residential property price is falling in of the?

ô€‚¾ Why did you pursue these questions or issues in your research?

ô€‚¾Did you have any expectations of what you might find out at the start of your research? If so, what and why, and have these changed, and why?

ô€‚¾ Highlighting the main point of each section as it relates to the title.

ô€‚¾ Being able to show the reader what makes my research different to the previous research

Background Information

This section is about

ô€‚¾ What are the main goods and services of the industry involved ie finance, mortgage property

ô€‚¾ What is the historical/social/ economic background of the Uk Residential property? The scope is London

ô€‚¾ What are the values, culture or policies underpinning the UK Residential property? London

ô€‚¾ What is the background to the particular situation or phenomena examined? If relevant, why has a particular situation arisen?

Literature Review

This part should answer these questions

ô€‚¾ What previous research has already been done on this topic? Who did it, when and why?

ô€‚¾ What conclusions did previous researchers reach?

ô€‚¾ How relevant are these conclusions today generally and for your own research?

ô€‚¾ How does your research build on previous research? How is it similar or different (e.g.

similar/different models or methods used etc),

ô€‚¾ Who are the principal commentators and theorists in the subject you researched?

Methodology

I must be able to answer to the questions below in this part of my report

ô€‚¾ How has the previous research influenced the research methodology and methods?

ô€‚¾ What philosophical approach did you take to your research,

e.g. qualitative/Quantitative? Inductive/Deductive?

ô€‚¾ Why did you adopt this approach?

ô€‚¾ In retrospect was this the correct approach?

ô€‚¾ What methods (to gather primary/secondary data) did you decide to use and why?

ô€‚¾ What criteria did you adopt for collecting this data (e.g. target number, age, gender,

occupational etc) and why?

ô€‚¾ If relevant, who are the main people involved in the research and their roles and

responsibilities?

ô€‚¾ What was the target sample number? What type of sample was it, e.g. a random sample?

ô€‚¾ What was the actual number you achieved? Why was there a shortfall?

ô€‚¾ Where did you collect the data? When did you collect it? How did you collect it?

ô€‚¾ Who was involved in the collection?

Data Analysis Test and Results

must be able to tell or to answer

How was it an*****d? What analytical method(s) did you apply to draw the results?

ô€‚¾ What logistical or other problems did you encounter in collecting or analysing it?

ô€‚¾ What was the result of the findings?

ô€‚¾ Were the results affected in any way by any event, situation or phenomenon?

ô€‚¾ If there was a shortfall in the amount of data you gained, how have you compensated or dealt with this situation?

ô€‚¾ How does the amount of data collected by you compare or contrast with previous research in this area of enquiry?

ô€‚¾ What is the best way of presenting these results in the report?

Discussions

In the results I must be able to explain

ô€‚¾ How do the findings connect with the overall research aim and research questions?

ô€‚¾ What do the findings mean in theory and/or practice?

ô€‚¾ How unexpected/expected were some or all of the findings?

ô€‚¾ How can the findings be applied?

ô€‚¾ When can they be applied?

ô€‚¾ Who could apply them?

ô€‚¾ What recommendations can be made based on the research findings?

Conclusions: Some questions to ask

ô€‚¾ the main aims and findings of my research?

ô€‚¾ the practical or applied applications of my findings for others?

ô€‚¾ the unexpected problems that arose and the limitations of the research?

ô€‚¾ How future research might build on where I left off?

ô€‚¾ The last sentence I will write?

Research objectives

The objective of my research is to investigate to what extend the instability in the financial economy has affected the UK residential property market especially in the South East of the England. The special focus is to explore the possibility that the falling price of property can develop a new trend in home ownership and the buy-to- let phenomenon which in the last decade has been seen as an investment heaven for households and investors.

Expectations of outcome and conclusions

The expectations from my findings should indicate that in spite of the falling price of property in the UK in general in some areas the price are stable or increasing. There could still be an opportunity for Buy-to-let investor to increase their portfolio. The finding should indicate that the attitude towards ownership is in decline and that the rental market is increasing. The conclusions should be based on the finding that the preference for rental market is an opportunity for buy to let investors which could create a niche market for some mortgage lenders.

Please below is the project proposal marked and approved by my supervisor

Project Proposal MBA

Title: The Effect of the credit crunch on UK Residential property: Is there an opportunity for the buy-to- let?

Introduction

What began last year as a problem in American funds exposed to subprime mortgages has snowballed into one of the worst financial crises in modern history (Rayner, 2008). In the third quarter of 2007 the credit crunch shook the USA financial industry and sent shock waves to the rest of the world. Almost all financial institutions were affected lenders can no longer raised fund on the money market. Most banks especially those in the subprime market tightened the lending criteria between themselves and to customers. This financial instability first casualty was Northern Rock, the fifth mortgage lender in the British market who could no longer borrow money from the US Banks to finance its activities seek liquidity from the Bank of England, which precipitated its collapse and nationalisation (Giles, 2008). The housing market has experienced a downfall in mortgages approval and a subsequent slow down in the property market leading to an annual 10.9% drop in property prices across the UK as reported by Halifax leading mortgage lender (hbos, 2008).

Research Objectives

The objective of my research is to investigate to what extend the instability in the financial economy has affected the UK residential property market especially in the South East of the England. The special focus is to explore the possibility that the falling price of property can develop a new trend in home ownership and the buy-to- let phenomenon which in the last decade has been seen as an investment heaven for households and investors.

Research Questions

The questions to guide through my research would be:

*****¢ Why are banks reducing their loan and mortgage approval?

*****¢ How home-owners and investors are reacting to the change in market condition?

*****¢ Which areas are the most affected?

*****¢ Are we facing the end of home ownership and increase in renting?

*****¢ Is there a bargaining power for cash rich buyer?

Relevance

Over the past 12 years the property industry has enjoyed a sturdy and sustained period of growth, which has seen the average property price tripled (Mintel). This boom has encouraged a large percentage of the UK household to invest in home-ownership with most purchasing a second home. The Mortgage lenders increased flexibility to borrower and expanded their share on the buy-to-let market coupled with the increased media hype around the profitable property market; many consumers seized the opportunity to become landlords, property developers/investors.

However, in the last quarter of 2007, the housing market has experienced a low level of mortgage approval and a falling price of property. More than a year on, the situation rather than improve continue to slump.

The relevance of this research is: when the price of property fall and mortgage rules are tightened who can benefit from the situation.

Research Methodology

Quantitative research described as the research strategy that emphasises the quantification in the research of data, will be the predominant method used for my research (Bryman and Bell, 2007). Qualitative approach will be included to search for consistencies and trend in the increase for preference for rental over property ownership will also be included.

Part of the research method will consist of keeping a diary, as the subject of the dissertation is based on an ongoing situation which will guide the progress and conclusions of my research.

Data Collection

The collection of information will be a combination of primary and secondary data. For my secondary data, a range of carefully selected sources including government institutions namely the Bank of England, the Office for National Statistics; major players in the property market, the Council of Mortgage Lenders, the RICS, Estate gazette and broadsheet newspaper specialised in the economy and financial market will be reviewed as well as various researchers articles on the topic. This will ensure the validity and reliability of the research.

Primary data will be collected using questionnaires with both open and closed questions that will be distributed to various mortgage lenders such as Halifax Plc. Nationwide and Bradford and Bingley Building Society as well as to buy-to-let investors and private landlords. This survey will give me insight data on consumer*****s attitude on property towards the current financial situation.

Expectations of outcome and conclusions

The expectations from my findings should indicate that in spite of the falling price of property some areas are not affected. There could still be an opportunity for Buy to let investor to increase their portfolio. The finding should indicate that the attitude towards ownership is in decline and that the rental market is increasing. The conclusions should be based on the finding of the preference for rental market is an opportunity for buy to let investors which could create a niche market for some mortgage lenders.

Reference list

Bryan A. and Bell E., (2007) Business research method, Oxford University, United Kingdom

Giles, C. (2008), Northern Rock-one year one, Financial Time: http://www.ft.com/cms/s/0/3ca21616-8112-11dd-82dd-000077b07658,dwp_uuid=74d73d92-650f-11dc-bf89-0000779fd2ac.html accessed 16/09/2008

Griffiths, R. (2007), UK feels weight of the credit crunch. Mortgage strategy , 49-49

Available from: Business Source Complete Fulltext [accessed1 september 2008]

Muellbauer, J and Murphy, A., (1997) Booms and busts in the UK housing Martket, Economic Journal 107 (445), 1701-1727. [online] Available from: Web Knownedledge Fulltext

Rayner, G. (2008), Credit Crunch Timeline: from Northern Rock to Lehman Brothers, Telegraph: http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/09/15/bcntimeline115.xml, accessed 16/09/2008

Websites:

Bank of England: http://www.bankofengland.co.uk/financialstability/index.htm

Council of mortgage Lender: http://www.cml.org.uk/cml/media/press/1893

Royal Institute of Chartered Surveyors http://www.rics.org/Newsroom/Keyissues/UKresidentialpropertymarket/hms_aug2008_090908.htm.htm

Office for National Statistics: http://www.statistics.gov.uk/

Mintel:

http://academic.mintel.com/sinatra/oxygen_academic/search_results/show&/display/id=290765

Halifax: http://www.hbosplc.com/media/pressreleases/articles/halifax/2008-09-04-HousePrice.asp?section=halifax

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